Earlier this week, the Board of Governors of the Federal Reserve System (the “Board”) solicited public comment, through an advance notice of proposed rulemaking (the “ANPR”), regarding various issues and questions related to physical commodities activities conducted by financial holding companies (“FHCs”) and the restrictions imposed on these activities. The Board is seeking comment in connection with a review of the scope of the activities that it has authorized under the “complementary” authority in the Bank Holding Company Act of 1956 (the “BHC Act”) (Section 4(k)(1)(B)) to ensure these activities are complementary to a financial activity and do not pose substantial risks to the safety and soundness of depository institutions or to the financial system generally. It is also considering whether additional limitations or conditions on the conduct of physical commodities activities by FHCs and their subsidiaries under “complementary” and other authority granted under the BHC Act, specifically the Gramm-Leach-Bliley Act (“GLBA”) merchant banking authority and commodities grandfather authority, are warranted in order to mitigate any risks to the safety and soundness of FHCs, as well as any potential risks to financial stability. With respect to “complementary” authority, the Board also questions more broadly whether the relationship between physical commodity markets and commodity derivatives activities “are as close as previously claimed or expected”, especially in light of recent public reports that some FHCs plan to cease their physical commodities activities but continue to conduct the related financial activities or sell their physical commodities business to a nonfinancial firm. As a result, the Board is soliciting comment on narrowing or eliminating altogether the complementary authority to engage in physical commodities activities.

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